Last weekend I started my Charts Blog with: “Finally the Bears have come out for their Honey………” my goodness, they certainly came out and I didn’t realise they would be so greedy and scoff so much !!!
My Portfolio took a right kicking last week and it ended up dropping 4.3% in the 5 days and this means that for 2018 overall I am now in a Loss situation with damage to the tune of 3.3%. It has been such a funny start to the year because I had a super strong first week but then did nothing much through the rest of January and then got whacked last week - not the sort of start I wanted !!
As usual I will look at some Index Charts later to try to get a feel for where we are likely to go next but before that I just want to re-iterate what I think I said last week about how I just don’t see this as being the start of a full-on proper Bear Market like many ‘talking heads’ on Bloomberg and the like are saying. Financial TV loves sensationalism (like all Media because it captures people’s attention and that means Subscription and Advertising Revenues) and wheeling out the Ultra-Bear and Ultra Bull at various Market Troughs and Peaks totally pumps up Viewers’/Readers’ emotions and feeds the Fear and Greed.
In my experience full-on Proper Bear Markets (the textbook definition is a 20% fall from the Peak but I see a Bear Market as a situation where all the Major Indexes get into Medium-term Downtrends and just keep dropping with any attempts to Rally being sold down. The textbook definition is ridiculous because a fall of 20% tells us nothing useful about the Future and that is what we as Investors/Traders are interested in - it only tells us what has just happened - which we already know because we are penniless and very miserable - we don’t need some clever Market Pundit telling us the bleedin’ obvious), only seem to happen when the Global Economy goes into a Recession - this was the case in 2003 and 2008 but I think we have entirely the opposite situation now and the Global Economy seems to be going into a Boom if anything. Expect more good Economic News this Week and note how it is coming form every part of the Globe in a proper ‘synchronised’ move.
It really looks to me like this is a healthy Correction within the Long Term Uptrend and really we have not had such a spanking since Early 2016 when the Oil Price and Commodity Prices in general fell off a cliff and took the Markets with them. To go 2 Years without a Correction is a very long time (for perspective, Bear Markets normally only last maybe a Year or so at the most) and apart from that we only had a couple of ‘Flash’ events around the Brexit Vote and the Trump Election where the Markets tanked for a matter of Hours and then recovered like a Saturn V being launched at Cape Canaveral. So it was long overdue.
I have read some stuff about this recently and the causality seems to be that Global Recessions and therefore Bear Markets come about as a result of Errors in Government Policy (this is usually from Interest Rates been pushed up too high, too fast or perhaps War situations etc.) or from Errors driven in the Private Sector (ultimately Governments could be blamed here for Bad Regulation and Oversight) such as the Sub-prime Mortgage Crisis and the wrapping of Junk Debt into packages with much lower Risk Ratings than they should have had.
As I perceive things at the moment (and of course I could easily be wrong), I am not seeing anything like the kind of Policy Errors that would immediately trigger a Global Recession although around the World it is not hard to spot some very questionable Policy such as the whole Quantitative Easing thing and massive Over-regulation (there was more evidence of the latter in this Week’s Investors Chronicle with an article about the dominance of the FANG Stocks [Facebook, Apple, Amazon, Netflix, Google etc.] and how Mega Businesses are taking an increasing share of US GDP [and by extension GDP around the Globe] and I contend that much of this is down to Over-regulation and Bad regulation which is done to favour Big Business and to squeeze out Small and Middle sized Companies and Start-ups - the European Union is particularly criminal in this regard and it was a major reason in why I voted to escape the tyranny of the Evil Empire.)
The Usual ‘Experts’ have been blaming the Market Falls on fears around Inflation and the Fed in particular raising Interest Rates too soon. As always, I think this is more bilge and the simple reality is that Markets fell because they had got insanely over-bought as I have been pointing out in my Weekend Charts Blogs for weeks and weeks - this should not have been a surprise to any Readers. It was typical, the Market falls and then the Financial Media has to have a ‘reason’ - and of course saying “the market has fallen because it had run up too far and now there were no Buyers left prepared to pay so much and therefore the ‘heat’ had to come out and the Market fell. Now we will show you some Puppies because we have nothing useful to talk about….”, isn’t really going to cut it with terrified Viewers and Advertisers looking for big Ratings.
I think the fears over Inflation are hugely overdone. We have had a problem of Deflation for at least 10 years and if you look at Japan, they have had the problem for maybe 20 years plus (talking of insane Policy pratices………). The drivers of this are probably the Internet Revolution which increases competition and enables easy and quick Price Comparison which drives down Prices (that is what Deflation is !!) and aging Populations in Western Economies with low Birth Rates on top is chopping out demand. Old gits like me just don’t spend money.
So it strikes me that any Inflation in the system could be temporary (this is certainly the case in the UK where the weak Pound after the Brexit Vote made Imports, such as Oil, more expensive but this will fall out of the 12 Month figures soon and with the Pound pretty much recovered against the Dollar this has taken away a lot of Inflation pressure), and there isn’t much anyway. In fact, I was reading something recently which made the case that the ‘high’ Inflation many of us will have experienced in our Lives (this occurred probably from the 1960s through to the Credit Crunch) is actually not ‘normal’ and is if anything an anomaly. So historically Low Inflation and consequently Low Interest Rates are the Norm.
The theory the ‘Experts’ trot out is that with Interest Rates about to shoot up rapidly with Global Growth accelerating, Central Banks will push up Interest Rates far too quickly and this will choke off the Recovery and push everywhere into Recession - this just seems plain daft. Firstly the Central Bankers are from the same ranks as the ‘Experts’ and will be just as aware of the dangers of pushing up Rates too fast and secondly there is so much Debt in the system (both in the Public and Private Sectors) that there is no way any Economy could cope with Interest Rates suddenly going up to high levels. It is simply not going to happen and if Inflation were to go up significantly, you can bet any Dollar you have left that Governments around the World will frig the Inflation Figures (just like all Unemployment Figures are false) to convince their dozy Population that all is well and they really should vote them into Power next time as well.
Consumer Debt has never been higher and this is the case for most Western Economies. One side-effect of this is that whereas back in the 1980s we might have had Central Banks pushing Rates up to 10% or so in order to calm down an overheating Economy, now it might be that a move to only 4% would cause a slowing down effect. This is double-edged, it means that it would be very easy for Central Bankers to push Rates up too high which could tip us into Recession but on the flipside it means that Interest Rates are likely to remain Low by historical standards and this will be supportive of Economic Growth and mean that Mortgage Rates and suchlike will remain affordable.
On the Government side of things Debt is utterly insane and this is a key reason why Interest Rates cannot go up much (and then we get idiots like Corbyn wanting to borrow more !!!!!) - it is simple maths and not that hard. At the moment something like a sum of Money higher than what the UK spends on Education and Defence combined goes on servicing Debt Interest Payments and with Public Services under pressure in every facet of Society, there is just no way that a sensible and responsible Government can let those Payments increase much - already Public Services are squeezed to breaking point. It is a complete fantasy that Central Bankers are ‘independent’ (you only need to look at how the Government roped Mark Carney into the Brexit ‘Project Fear’ scaremongering with ludicrous Economic Forecasts to see how tied to Government they are) and they will do exactly what the Government wants/needs - and this is for Interest Rates to stay low.
From the recent Peak, the S&P500 fell 11.9% (I worked this out from the numbers on ShareScope of 2873 as the Highest Point and 2532 as the Low Point of the huge Hammer Candle which was formed on Friday - more on this in a mo), and to the Close on Friday at 2619 it fell 8.8% from the Peak. The ‘textbook’ definition of a ‘Correction’ is a 10% fall from the Peak and in line with this, it seems very much that we have just been through what would be called such a Correction. I take the view that this is exactly what has happened and we are not about to go into a Full-on Bear Market and despite perhaps some more wobbles and volatility, we will start to settle down now and Markets will embark on recovery. I could of course be utterly wrong but this is the Roadmap I will be following.
To that end I am very aware of the need to be buying Stocks now but unfortunately I just do not have any spare cash. However, such an Opportunity to buy really should be exploited I think and the only way I can manage it is to use the odd Spreadbet Long on an Index with a view to a Short Term Trade rather than a Long Term Investment. I already started with this approach by putting on a Long FTSE100 Spreadbet last week and it nearly got Stopped-out on Friday but just stayed above my Stoploss Trigger Level (more in a bit), and I will be looking to add to this Long in coming Days if I see a good Buy Signal. As usual I will Tweet out any action I take and it will be entered onto the ‘Trades’ page.
Last week was a nasty experience from a Psychological viewpoint but it is crucial to remain calm and objective and to not let the Noise around the Markets drag you down and lead you into errors - I saw a lot of Selling AFTER the Markets had dropped and I suspect this is really silly. The time to be Selling was when the Markets were up around the Peak and it was clear from the Charts when this was and I in effect Sold by putting a Short on the S&P500 - sadly it was smaller than I would have liked and the Markets fell so fast I did not have a chance to double it in size - but I made a little bit of Profit on it so that did help soften the blows to a quite limited extent. However, at least I haven’t been selling at the Bottom when that is the time to be Buying.
“Buy Low, Sell High” (I think it was Reggie Perrin who gave us that sage advice or it might have been Alan B’stard).
For people who were shrewd enough to be Selling at the Top and who are now cashed-up, this looks to me like a great to time to be hunting out ‘Bargains’ and many Stocks in my Portfolio look very beaten up and ready to pounce on. In particular, for people wanting to build an Income Portfolio many High Dividend Stocks are looking very attractive.
Anyway, I am probably too late with this (I hope so, I am not sure my jangled nerves can cope with much more of what we suffered last week !!) but here is a link to a Blog I wrote probably 3 years ago now about how to best manage during a phase of the Market where Stock Prices keep tanking:
I also tripped over this one when I was looking for the first one:
I had a chat over the Phone last night with my mate who I mentioned at the start of the Blog Series on how to build an Income Portfolio. You may remember that he is on the verge of Retiring and has a chunk of money in a Pension Pot that he had considered buying an Annuity with but he did smell a Rat and after some Pub discussions with me he has pretty much decided to create his own Income Portfolio of Stocks along the lines which I have outlined. Anyway, he is not quite ready yet but over the next few months he needs to get something set up and I expect to be helping him build his Income Portfolio and I will report back to WD Readers on what Stocks we have chosen. It seems likely we will go for 16 Stocks because he has quite a chunk of Money and he likes the idea of more Diversification to try and lower the overall Risk.
Part of the final shove to get him going in this direction was that he did some back-testing based on the 12 Stocks in my own Income Portfolio (see the ‘Portfolios’ page on this Website) and the results over a period of 5 years were very impressive - however, I am waiting to clarify a few of the Parameters with which he did this before divulging the numbers that came out - but I suspect his Assumptions have been correct and sensible. Once I have more clarity on this I will probably write about it in a Charts Blog but one thing that is obvious is that the Dividends are making the largest contribution to Returns by far, rather than any Capital growth.
Evolution of an Investor
The first part of the Blog Series on how I developed over time as an Investor went live late last Week and I expect to issue the next chunk towards the end of the coming Week - it is almost entirely written in Draft form now so it shouldn’t be too onerous for me to Proof Read it and tweak the layout - although I was very frustrated that I could not get the formatting looking nice on the Website whilst at the same time making the text readable for you lot and not just a ‘Wall of Text’.
I won’t do many Charts this week as really it is at a Market level where I am more interested and I think we should be cautious with any Buys we do on Individual Stocks despite what I have said earlier. I take the view this is just a Healthy Correction but I could be wrong and piling all-in now with every Penny you have might not be wise. If there are Stocks that look like Bargains and are desired, then it might be best to feed some Money in over time. I rarely find that rushing into something and being reckless and unthinking works when playing this Game.
From the Price Action on Friday I think the US Markets are likely to drive things across the other Major Indexes and we will look at those in a bit. I wanted to start on the FTSE100 because I have a Long Position on this one and the Chart below is my ‘working’ screen (as always, the ScreenScrapes are from ShareScope)with the details on my Long described in the Text Box with large writing down in the bottom Right Hand Corner.
The Little Blue Line, marked by my Blue Arrow, is where I opened the Long Position and the Pink sort of Line down at 7070 is where my Stoploss is. This will be triggered if the Market Closes below that Level and I do not have a ‘hard-coded’ Stoploss with my Spreadbet Broker (igindex) and I will manually close the Position and take a small Loss if that happens.
My Green Arrow is pointing at a Big Red Down Candle from Friday and in isolation without looking at anything else (in particular the US Markets which did something very exciting on Friday), this looks pretty Bearish - although I note it did manage to Close a tiny bit up off the Low Point which might be a tiny glimmer of hope. Note the long string of Red Down Days which took place over the last 2 Weeks - this is almost a Straight Line down and shows an extremely fast move - it is hard to believe that a Bounce of some sort won’t happen very soon after such a fast move. Think of an Elastic Band being stretched quickly and then snapping back.
Sorry about the mess on the Chart below - there are just a few things I want to point out here and I don’t want to burn time cleaning it all up. I sent a variation of this Chart out on Twitter earlier in the Week and I think what I will show is pretty important. What I want you to focus on are the Parallel Blue Lines. If you look at the Black Arrow this points to the Top Blue Line of an Uptrend Channel and then where my Blue Arrow is I have not had many ‘Touch Points’ but by running the Line in Parallel to the Top Line, this is probably going to be valid.
The Candles shown here are the Weekly ones but that does not matter and if you were to use a Daily Candles Chart you could get the same Uptrend Channel. My Yellow Box is highlighting the Red Down Candle from Friday and look how it has just slightly overshot my Bottom Blue Line but I suspect that it could be more about the inaccuracies of my Line positioning rather than it being the case that the FTSE100 is now going to keep dropping - but of course if might. If the Price turns up from here, then that might create another ‘Touch Point’ and actually make my Bottom Blue Line extremely valid and good Support going forwards. I have other Charts to support my view that we might turn up here.
This is a key part of my reasoning for a Bounce (apart from the lead the US will be giving us) - in the Bottom Window in the Screen below we have a reading of RSI 30 for the Relative Strength Index and this is very low by the normal standards of the RSI for the FTSE100. This is the kind of level where a Bounce is very possible.
The Chart below has the Daily Candles for the FTSE100 but what I want to show here are various Support Levels just below where we are now. We are pretty much around the 7100 Level at the moment then we have 7000 and a wide area of Support down to 6700 - in other words, if a key Level like 7000 fails (this is a Psychological Level as much as anything), it is probable we will drop to the Strong Support at 6700.
To the upside we now have Resistance at 7100, 7200, 7300 etc. - remember, ‘Former Support becomes Resistance and vice-versa’.
My Black Arrow is pointing out how we had a 13/21 Day Exponential Moving Average ‘Death Cross’ recently (the Red Wobbly Line crosses down through the Green Wobbly Line) and look how predictive this was and it saw the Falls coming. A great Indicator and one of my favourites.
The Chart below has the Daily Heiken Ashi Candlesticks - remember these are very different to normal Candlesticks. My Yellow Circle is highlighting the Big Down Red Candle we got on Friday and this suggests more falls to come - but remember the cost for the clarity we get with HA Candles comes at the expense of timing and it is very possible that we could turn up now before it shows up on the HA Candles. My Pink Circle is pointing out the kind of Narrowing and then turning White that we want to see on the HA Candles in the next few days.
I’m going to knock out two Sparrows with one Rock here - I wanted to make a quick point that the FTSE250 is pretty much identical to the FTSE100 and if you look at the Candlesticks you should see this similarity. This is something worth nothing - I often hear people saying “oh, it’s the Individual Stocks that matter” but I have no doubt the reality is that when Markets drop like they have lately then Correlations change and even a Company putting out strong Results can get whacked. In Market falls everything becomes Correlated in the same direction (ok, there may be one or two exceptions but these are very rare).
The other thing I wanted to point out, and it is the same on the FTSE100, is that where my Green Arrows are I am pointing out the ‘gap’ between where the Price is now and the 200 Day Moving Average which is the Light Blue Wavy Line. Note the US Markets are still around their 200 Day Moving Averages which we will see in a bit. With the UK Markets so far from this important Long-term Average, it is highly likely that ‘Mean Reversion’ will pull the Markets back up to get them nearer that 200 Day MA.
The Smaller UK Indexes are pretty much the same although the AIM All-Share is a bit better in the sense that it is around the 200 Day MA not miles below it.
I am loving this Chart - I noticed the Intraday Reversal on Friday where a Market that was down heavily early on rallied hugely during the Day and by the Close we got that outstanding example of a Hammer Candle which is shown below with my Black Arrow. What makes this Hammer so sweet is that the ‘Context’ is top notch because there had been a lot of Heavy Falls beforehand for a sustained period and also because the ‘Tail’ on the Hammer (the Handle bit if you prefer) is really very long and that is good.
Hammers like this are a classic Graphical representation of a ‘Capitulation’ which occurs when exasperated and frustrated Bulls ‘throw in the towel’ and finally accept defeat and Sell their Shares right at the bottom which coincides with Smarter and Calmer Bulls jumping on the big Price Moves and driving the Shares back up after the initial panic. So often this is exactly the kind of ‘Clearance’ that the Market needs to finally draw the preceding falls to an end and get the Trend moving up again.
Note the Bottom of the Hammer Tail was pretty much bang on the 200 Day MA Line which is pointed at with my Red Arrow. The 200 Day MA is often a good Support Level and it clearly was here and even if we cannot build on this Hammer (I think we will), at least we have established the 200 Day MA as good Support.
Up above at about 2720 is the 50 Day MA which I have pointed at with my Blue Arrow - if we do get a Bounce, this could act as a difficult Resistance Level to get over. My Green and Yellow Boxes are highlighting Support and Resistance Zones.
In the bottom window on the Screen below we have the RSI for the S&P500 Daily - on a Reading of RSI 38 it is pretty low and importantly it has turned up from a lower Reading of RSI 34 - it looks good.
The Chart below has the Weekly Candles for the S&P500. My Green Arrow is pointing to the Candle from Last Week and note it has a long ‘Tail’ and that this touched the 200 Day Moving Average Line (which is as you would expect because it reflects what happened on Friday but it looks good).
The other US Indexes like the DOW and the Nasdaq Composite are very similar although the DOW is higher up off its 200 Day Moving Average.
I’m going to leave it there because I have not been feeling great today and I want to get this done and go to bed - Good Luck for the coming Week and remember to stay calm and don’t keep looking at your Screen because it just feeds your worries.
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